Power in a Theory of the Firm

Transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments. Past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this. Within the contractibility assumptions of this literature,...

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Bibliographic Details
Published in:The Quarterly journal of economics 1998-05, Vol.113 (2), p.387-432
Main Authors: Rajan, Raghuram G., Zingales, Luigi
Format: Article
Language:English
Subjects:
Economic models
Entrepreneurs
Financial investments
Financial management
Human capital
Investment strategies
Investment value
Investments
Organizational behavior
Ownership
Ownership incentives
Property rights
Resource allocation
Return on investment
Studies
Surplus
Transactional analysis
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Summary:Transactions take place in the firm rather than in the market because the firm offers power to agents who make specific investments. Past literature emphasizes the allocation of ownership as the primary mechanism by which the firm does this. Within the contractibility assumptions of this literature, we identify a potentially superior mechanism, the regulation of access to critical resources. Access can be better than ownership because (i) the power agents get from access is more contingent on their making the right investment and (ii) ownership has adverse effects on the incentive to specialize. The theory explains the importance of internal organization and third-party ownership.
ISSN:0033-5533
1531-4650
DOI:10.1162/003355398555630